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whether the seller is entitled to forfeit the earnest money deposit where the sale of an immovable property falls through by reason of the fault or failure of the purchaser.. We are, therefore, of the view that the seller was justified in forfeiting the amount of Rs.7,00,000/- as per the relevant clause, since the earnest money was primarily a security for the due performance of the agreement and, consequently, the seller is entitled to forfeit the entire deposit. The High Court has, therefore, committed an error in reversing the judgment of the trial court.

2. The question that has come up for consideration in this appeal iswhether the seller is entitled to forfeit the earnest money deposit wherethe sale of an immovable property falls through by reason of the fault orfailure of the purchaser.
3. An Agreement for Sale of property bearing No. 14/11, 2nd Floor,
Punjabi Bagh, New Delhi was entered into between the appellant (Seller) and
the respondent (Purchaser) on 29.11.2005 for a total consideration of
Rs.70,00,000/- to be paid on or before 5.3.2006 and, towards earnest money,
an amount of Rs.4,00,000/- was paid on 29.11.2005 and another Rs.3,00,000/-
on 30.11.2005, that means, altogether Rs.7,00,000/- was paid, being 10% of
the total sale consideration. The purchaser, however, could not pay the
balance amount of Rs.63,00,000/- before 5.3.2006, consequently, the sale
deed could not be executed. Seller, therefore, did not return the earnest
money to the purchaser.
4. Consequently, the purchaser, as plaintiff, instituted a suit No.
764/08/06 before the Additional District Judge, Delhi for recovery of
Rs.7,00,000/- from the seller-defendant of the earnest money paid by him.
Defendant contested the suit stating that, as per the agreement, he is
entitled to forfeit the amount of earnest money, if there was a failure on
the part of the purchaser-plaintiff in paying the balance amount of
Rs.63,00,000/-.
5. The trial Court dismissed the suit holding that the defendant is
entitled to retain the amount of earnest money since the plaintiff had
failed to pay the balance amount of Rs.63,00,000/- before 5.3.2006.
6. Aggrieved by the judgment of the Additional District Judge, Delhi,
plaintiff took up the matter in appeal before the High Court of Delhi by
filing R.F.A. No. 137 of 2010. The High Court, placing reliance on the
judgment of this Court in Fateh Chand v. Balkishan Dass AIR 1963 SC 1405,
took the view that the seller is entitled to forfeit only a nominal amount
and not the entire amount of Rs.7,00,000/-. The High Court further held
that the seller can forfeit an amount of Rs.50,000/- out of the amount of
Rs.7,00,000/- and he is bound to refund the balance amount of Rs.6,50,000/-
to the purchaser. To this extent, a decree was also passed in favour of
purchaser against the seller. It was also held that the purchaser is also
entitled to interest @ 12% per annum from 29.11.2005 till the amount is
paid.
7. Aggrieved by the said judgment of the High Court, the seller has come
up with this appeal.
8. We have heard the learned counsel on either side at length. Facts
are undisputed. The only question is whether the seller is entitled to
retain the entire amount of Rs.7,00,000/- received towards earnest money or
not. The fact that the purchaser was at fault in not paying the balance
consideration of Rs.63,00,000/- is also not disputed. The question whether
the seller can retain the entire amount of earnest money depends upon the
terms of the agreement. Relevant clause of the Agreement for Sale dated
29.11.2005 is extracted hereunder for easy reference:
“e) If the prospective purchaser fail to fulfill the above
condition. The transaction shall stand cancelled and earnest
money will be forfeited. In case I fail to complete the
transaction as stipulated above. The purchaser will get the
DOUBLE amount of the earnest money. In the both condition,
DEALER will get 4% Commission from the faulty party.”
The clause, therefore, stipulates that if the purchaser fails to fulfill
the conditions mentioned in the agreement, the transaction shall stand
cancelled and earnest money will be forfeited. On the other hand, if the
seller fails to complete the transaction, the purchaser would get double
the amount of earnest money. Indisputedly the purchaser failed to perform
his part of the contract, then the question is whether the seller can
forfeit the entire earnest money.

9. The question raised is no more res integra. In (Kunwar) Chiranjit
Singh v. Har Swarup AIR 1926 P.C. 1, it has been held that the earnest
money is part of the purchase price when the transaction goes forward and
it is forfeited when the transaction falls through, by reason of the fault
or failure of the purchaser. In Fateh Chand (supra), this Court was
interpreting the conditions of an agreement dated 21.3.1949. By that
agreement, the plaintiff contracted to sell his rights in the land and the
building to Seth Fateh Chand (defendant). It was recited in the agreement
that the plaintiff agreed to sell the building together with ‘pattadari’
rights appertaining to the land admeasuring 2433 sq. yards for Rs.1,12,500/-
and that Rs.1,000/- was paid to him as earnest money at the time of the
execution of the agreement. The conditions of the agreement were as
follows:

“(1) I, the executant, shall deliver the actual possession, i.e.
complete vacant possession of kothi (bungalow) to the vendee on the
30th March, 1949, and the vendee shall have to give another cheque for
Rs. 24,000/- to me, out of the sale price.
(2) Then the vendee shall have to get the sale (deed) registered by
the 1st of June, 1949. If, on account of any reason, the vendee fails
to get the said sale-deed registered by June, 1949, then this sum of
Rs. 25,000/- (twenty-five thousand) mentioned above shall be deemed to
be forfeited and the agreement cancelled. Moreover, the vendee shall
have to deliver back the complete vacant possession of the kothi
(bungalow) to me, the executant. If due to certain reason, any delay
takes place on my part in the registration of the sale-deed, by the
1st June 1949, then I, the executant, shall be liable to pay a further
sum of Rs. 25,000/- as damages, apart from the aforesaid sum of Rs.
25,000/- to the vendee, and the bargain shall be deemed to be
cancelled.”

Plaintiff, on 25.3.1949, received Rs.24,000/- and delivered possession of
the building and the land in his occupation to the defendant.

10. Alleging that the agreement was rescinded because the defendant
committed default in performing the agreement and the sum of Rs.25,000/-
paid by the defendant stood forfeited. Plaintiff instituted a suit. The
defendant resisted the claim contending inter alia that the plaintiff
having committed breach of the contract could not forfeit the amount of
Rs.25,000/- received by him. The matter ultimately came to this Court.
This Court considered as to whether the plaintiff could forfeit the amount.
Noticing that the defendant had conceded that the plaintiff was entitled to
forfeit the amount which was paid as earnest money, the Court held as
follows:
“(16) ……….The contract provided for forfeiture of Rs. 25,000/-
consisting of Rs. 1000/-paid as earnest money and Rs. 24,000/- paid as
part of the purchase price. The defendant has conceded that the
plaintiff was entitled to forfeit the amount of Rs. 1,000/- which was
paid as earnest money. We cannot however agree with the High Court
that 10 per cent of the price may be regarded as reasonable
compensation in relation to the value of the contract as a whole, as
that in our opinion is assessed on arbitrary assumption. The plaintiff
failed to prove the loss suffered by him in consequence of the breach
of the contract committed by the defendant, and we are unable to find
any principle on which compensation equal to ten percent of the agreed
price could be awarded to the plaintiff. The plaintiff has been
allowed Rs. 1,000/-which was the earnest money as part of the damages.
Besides he had use of the remaining sum of Rs. 24,000/-, and we can
rightly presume that he must have been deriving advantage from that
amount throughout this period. In the absence therefore of any proof
of damage arising from the breach of the contract we are of opinion
that the amount of Rs. 1,000/- (earnest money) which has been
forfeited, and the advantage that the plaintiff must have derived from
the possession of the remaining sum of Rs. 24,000/-during all this
period would be sufficient compensation to him. It may be added that
the plaintiff has separately claimed mesne profits for being kept out
of possession for which he has got a decree and therefore the fact
that the plaintiff was out of possession cannot be taken into account
in determining damages for this purpose.’ The decree passed by the
High Court awarding Rs. 11,250/- as damages to the plaintiff must
therefore be set aside.”
11. We are of the view that the High Court has completely misunderstood
the dictum laid down in the above mentioned judgment and came to a wrong
conclusion of law for more than one reason, which will be more evident when
we scan through the subsequent judgments of this Court.

12. In Shree Hanuman Cotton Mills and Others v. Tata Air Craft Limited
1969 (3) SCC 522, this Court elaborately discussed the principles which
emerged from the expression “earnest money”. That was a case where the
appellant therein entered into a contract with the respondent for purchase
of aero scrap. According to the contract, the buyer had to deposit with
the company 25% of the total amount and that deposit was to remain with the
company as the earnest money to be adjusted in the final bills. Buyer was
bound to pay the full value less the deposit before taking delivery of the
stores. In case of default by the buyer, the company was entitled to
forfeit unconditionally the earnest money paid by the buyer and cancel the
contract. The appellant advanced a sum of Rs.25,000/- (being 25% of the
total amount) agreeing to pay the balance in two installments. On
appellant’s failure to pay any further amount, respondent forfeited the sum
of Rs.25,000/-, which according to it, was earnest money and cancelled the
contract. Appellant filed a suit for recovery of the said amount. The
trial Court held that the sum was paid by way of deposit or earnest money
which was primarily a security for the performance of the contract and that
the respondent was entitled to forfeit the deposit amount when the
appellant committed a breach of the contract and dismissed the suit. The
High Court confirmed the decision taken by the trial Court. This Court,
considering the scope of the term “earnest”, laid down certain principles,
which are as follows:
“21. From a review of the decisions cited above, the following
principles emerge regarding “earnest””
1) It must be given at the moment at which the contract is
concluded.
2) It represents a guarantee that the contract will be
fulfilled or, in other words, “earnest” is given to bind
the contract.
3) It is part of the purchase price when the transaction is
carried out.
4) It is forfeited when the transaction falls through by
reason of the default or failure of the purchaser.
5) Unless there is anything to the contrary in the terms of
the contract, on default committed by the buyer, the seller
is entitled to forfeit the earnest.”

13. In Delhi Development Authority v. Grihstrapana Cooperative Group
Housing Society Ltd. 1995 Supp (1) SCC 751, this Court following the
judgment of the Privy Council in Har Swaroop and Shree Hanuman Cotton Mills
(supra), held that the forfeiture of the earnest money was legal.

14. In V. Lakshmanan v. B.R. Mangalgiri and others (1995) Suppl. (2) SCC
33, this Court held as follows:
“The question then is whether the respondents are entitled to
forfeit the entire amount. It is seen that a specific covenant under
the contract was that respondents are entitled to forfeit the money
paid under the contract. So when the contract fell through by the
default committed by the appellant, as part of the contract, they are
entitled to forfeit the entire amount.”

15. In Housing Urban Development Authority and another v. Kewal Krishan
Goel and others (1996) 4 SCC 249, the question that came up for
consideration before this Court was, where a land is allotted, the allottee
deposited some installments but thereafter intimated the authority about
his incapacity to pay up the balance installments and requested for refund
of the money paid, was the allotting authority entitled to forfeit the
earnest money deposited by the allottee or could be only entitled to
forfeit 10% of the total amount deposited by the allottee till the request
is made? Following the judgment in Shree Hanuman Cotton Mills (supra),
this Court held that the allottee having accepted the allotment and having
made some payment on installments basis, then made a request to surrender
the land, has committed default on his part and, therefore, the competent
authority would be fully justified in forfeiting the earnest money which
had been deposited and not the 10% of the amount deposited, as held by the
High Court. In that case, this Court took the view that the earnest money
represented the guarantee that the contract would be fulfilled.
16. This Court, again, in Videocon Properties Ltd. v. Dr. Bhalchandra
Laboratories and others (2004) 3 SCC 711, dealt with a case of sale of
immovable property. It was a case where the plaintiff-appellants had
entered into an agreement with the respondents-defendants on 13.5.1994 to
sell the landed property owned by the respondents and a sum of
Rs.38,00,000/- was paid by the appellants as deposit or earnest money on
the execution of the agreement. In that case, this Court examined the
nature and character of the earnest money deposit and took the view that
the words used in the agreement alone would not be determinative of the
character of the “earnest money” but really the intention of the parties
and surrounding circumstances. The Court held that the earnest money
serves two purposes of being part-payment of the purchase money and
security for the performance of the contract by the party concerned. In
that case, on facts, after interpreting various clauses of the agreement,
the Court held as follows:
“15. Coming to the facts of the case, it is seen from the
agreement dated 13.5.1994 entered into between parties – particularly
Clause 1, which specifies more than one enumerated categories of
payment to be made by the purchaser in the manner and at stages
indicated therein, as consideration for the ultimate sale to be made
and completed. The further fact that the sum of Rs. 38 lakhs had to be
paid on the date of execution of the agreement itself, with the other
remaining categories of sums being stipulated for payment at different
and subsequent stages as well as execution of the sale deed by the
Vendors taken together with the contents of the stipulation made in
Clause 2.3, providing for the return of it, if for any reason the
Vendors fail to fulfill their obligations under Clause 2, strongly
supports and strengthens the claim of the appellants that the
intention of the parties in the case on hand is in effect to treat the
sum of Rs. 38 lakhs to be part of the prepaid purchase-money and not
pure and simple earnest money deposit of the restricted sense and
tenor, wholly unrelated to the purchase price as such in any manner.
The mention made in the agreement or description of the same otherwise
as “deposit or earnest money” and not merely as earnest money,
inevitably leads to the inescapable conclusion that the same has to
and was really meant to serve both purposes as envisaged in the
decision noticed supra. In substance, it is, therefore, really a
deposit or payment of advance as well and for that matter actually
part payment of purchase price, only. In the teeth of the further fact
situation that the sale could not be completed by execution of the
sale deed in this case only due to lapses and inabilities on the part
of the respondents – irrespective of bonafides or otherwise involved
in such delay and lapses, the amount of rupees 33 lakhs becomes
refundable by the Vendors to the purchasers as of the prepaid purchase
price deposited with the Vendors. Consequently, the sum of rupees 38
lakhs to be refunded would attract the first limb or part of
Section 55(6)(b) of the Transfer of Property Act itself and therefore
necessarily, as held by the learned Single Judge, the defendants prima
facie became liable to refund the same with interest due thereon, in
terms of Clause 2.3 of the agreement Therefore, the statutory charge
envisaged therein would get attracted to and encompass the whole of
the sum of rupees 38 lakhs and the interest due thereon…….”

In the above mentioned case, the Court also held as follows:
“14. …………Further, it is not the description by words used in the
agreement only that would be determinative of the character of the sum
but really the intention of parties and surrounding circumstances as
well, that have to be baked into and what may be called an advance may
really be a deposit or earnest money and what is termed as ‘a deposit
or earnest money’ may ultimately turn out to be really an advance or
part of purchase price. Earnest money or deposit also, thus, serves
two purposes of being part payment of the purchase money and security
for the performances of the contract by the party concerned, who paid
it.”

17. Law is, therefore, clear that to justify the forfeiture of advance
money being part of ‘earnest money’ the terms of the contract should be
clear and explicit. Earnest money is paid or given at the time when the
contract is entered into and, as a pledge for its due performance by the
depositor to be forfeited in case of non-performance, by the depositor.
There can be converse situation also that if the seller fails to perform
the contract the purchaser can also get the double the amount, if it is so
stipulated. It is also the law that part payment of purchase price cannot
be forfeited unless it is a guarantee for the due performance of the
contract. In other words, if the payment is made only towards part payment
of consideration and not intended as earnest money then the forfeiture
clause will not apply.
18. When we examine the clauses in the instant case, it is amply clear
that the clause extracted hereinabove was included in the contract at the
moment at which the contract was entered into. It represents the guarantee
that the contract would be fulfilled. In other words, ‘earnest’ is given
to bind the contract, which is a part of the purchase price when the
transaction is carried out and it will be forfeited when the transaction
falls through by reason of the default or failure of the purchaser. There
is no other clause militates against the clauses extracted in the agreement
dated 29.11.2011.
19. We are, therefore, of the view that the seller was justified inforfeiting the amount of Rs.7,00,000/- as per the relevant clause, sincethe earnest money was primarily a security for the due performance of theagreement and, consequently, the seller is entitled to forfeit the entiredeposit. The High Court has, therefore, committed an error in reversingthe judgment of the trial court.
20. Consequently, the appeal is allowed and the impugned judgment of the
High Court is set aside. However, there will be no order as to costs.